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RBI classification of Money

RBI classification of Money

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Published by prof_akvchary
12.

Reserve Bank of India Classification of Money

Objectives:
After studying this lesson, you will be able to understand, • • • • 12.1 The Narrow definition of Money RBI Measures of Money Narrow Money Broad Money Introduction

12.2 Debate on constituents of Money Supply 12.3 RBI Classification of Money

12.4 High Powered Money and Money Supply 12.5 Summary

12.6 Check your progress 12.7 Key concepts 12.8 Self Assessment questions

12.9 Answers to check your progress 12.10 Suggested Readings 1
12.

Reserve Bank of India Classification of Money

Objectives:
After studying this lesson, you will be able to understand, • • • • 12.1 The Narrow definition of Money RBI Measures of Money Narrow Money Broad Money Introduction

12.2 Debate on constituents of Money Supply 12.3 RBI Classification of Money

12.4 High Powered Money and Money Supply 12.5 Summary

12.6 Check your progress 12.7 Key concepts 12.8 Self Assessment questions

12.9 Answers to check your progress 12.10 Suggested Readings 1

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Published by: prof_akvchary on Jan 17, 2011
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02/03/2015

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12. Reserve Bank of India Classification of MoneyObjectives:
After studying this lesson, you will be able to understand,
The Narrow definition of Money
RBI Measures of Money
 Narrow Money
Broad Money12.1 Introduction12.2 Debate on constituents of Money Supply12.3 RBI Classification of Money12.4High Powered Money and Money Supply12.5 Summary12.6 Check your progress12.7 Key concepts12.8 Self Assessment questions
 
12.9 Answers to check your progress12.10 Suggested Readings
12.1 Introduction:
There is no clear-cut distinction between what is money and what are the measures of money supply. Money supply means the total amount of money in an economy. Theeffective money supply consists of mostly of currency and demand deposits. Currencyincludes all coins and paper money issued by the government and the banks. Bank deposits are regarded part of money supply and they constitute about 75 to 80 percent of the total money supply in the U.S. Some economists also include near money, or suchliquid assets as savings, deposits and government bills in the money supply. The totalsupply of money determined by banks, the Federal Reserve, businessmen, thegovernment and consumers.Money is something, which is measurable. Supply of money refers to its stock at any point in time; it is because money is a stock variable as against a flow variable (realincome). It is the change in the stock of money during a period, which is a flow. Thestock of money always refers to the stock of money held by the public. Through outhistory the question of not only what constitutes money but where it comes from has been both important and controversial.
12.2 Debate on constituents of Money Supply:
There is a debate whether the time and saving deposits to be included in money supply or not. What distinguishes these deposits is the fact that they earn an interest income and can be converted as means of payments only after some delay and not at once. As such thesetime and saving deposits are excluded from the pool of the money supply. However,alternative definitions of money have adopted by many writers. Notably, the Chicagoschool led by Milton Friedman opts to include all bank deposits, time and demand, in
 
money supply. In fact, Schwartz and Friedman are willing to consider as money allmarketable government securities, which are supported at par. By the same logic, there isno reason why the liabilities of saving institutions should not also be included in money.The debatable question is whether the measure of money should be extended to includeother deposits liabilities of the commercial banks, e.g., time deposits in USA and depositaccounts in the UK. Some investigators go further and include the liabilities of someother deposits taking institutions, such as savings and loan associations in the USA andsaving banks in Britain, on the grounds that their fixed monetary value makes them goodsubstitutes for interest bearing bank deposits. It has therefore, to be observed that variousmeasures of money supply keep on changing from country to country and from time totime within the country.
12.3RBI Classification of Money:
The Reserve Bank of India does not follow or clearly states any theory of money supplyor money stock. It simply publishes a purely accounting analysis of what it calls sourcesof change in money supply stock. The main constituents of money stock are a) currencywith the public b) Deposit money. These can be further split into what may be calledsources of money stock (a) Net Bank Credit to Government Sector (including RBI creditto Government Sector) (b) Bank credit to commercial sector. (c) Net foreign exchangeassets of banking sector (d) Governments currency liabilities to the public minus (e)Banking sectors net non-monetary liabilities.Up to 1968, the Reserve Bank of India published a single measure of money supplycalled M and latter on M
1
defined as currency and demand deposits held by public. It wascalled the narrow measure of money supply. After 1968 the RBI started publishing broader measure of money supply called aggregate monetary reserves defined as M or M
1
 plus the net time deposits of banks by the public (M
3
).

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